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How are Contracts Formed?

There are six elements that must exist in order to form a legally binding and enforceable contract. A contract can be formed by written, verbal or electronic communications. The six elements can be grouped into two categories: required conditions around the parties/contract and the core components of the contract.


Intention – the parties involved in the contract must have had the intention to form a contract.

Capacity – the parties involved must understand the nature and consequences of their decision to enter into a contract. Some examples include lack of mental ability, under the severe influence of substance(s), and under the age of majority (age 18 in Canada).

Legality – the contract must have a legal or lawful purpose. For example, a contract to steal or kill is not legally enforceable.

Contract Components

Offer – After some negotiations or identification of a need, one party has to propose a contract containing enough terms that could be accepted by the counterparty without reservation or other conditions.

Acceptance – A legal acceptance of an offer must be communicated clearly to the party who made the offer and the terms of the offer are accepted without additional conditions (Nothing added, changed, or taken away). If a new condition is proposed, this becomes a counteroffer that then has to be accepted by the other party.

Consideration – An exchange of promises must be made between the parties. Each party promises to do something or refrain from doing something in return for another promise. Memorandum of Understandings (MOU) and Change Orders are two types of agreements where consideration are often missed. Be sure you incorporate this if you want the agreement to be binding.

Note that contracts do not have to be fair as long as these six elements exist. The consideration does not have to be of equal value. If you realize later, that the contract you entered into is unfair or unprofitable, you are not able to change the contract without renegotiation and agreement from the counterparty.

The information discussed is based on Canadian law. I would like to see differences and similarities in other jurisdictions. Please provide insight in the comment section below if you are so inclined.


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